Taxable as income or capital gains?

BTL_Reading

Seeking advice on whether a particular payment I may be receiving will incur tax at income rates or capital gains rates.

I had shares in a company which was taken over, and the terms of the takeover were part lump sum and part based on profitability. After the lump sum payment there was a legal dispute and it's now being argued between lawyers (in USA). It seems very likely that the parties will settle (hopefully in my party's favour!) and there will be another lump sum as part of settlement.

I paid Capital Gains Tax on the original lump sum, but not sure what will be the tax liability of the settlement - if it's disconnected enough from the original sale to be considered pure income.

Anyone have experience of a situation like this?

Wayne_O_Mac

Based on the info provided, it's still CGT.

kidmugsy

Wayne_O_Mac wrote: »

Based on the info provided, it's still CGT.

Then how fortunate to get it in two tranches.

Pennywise

It could well be just one capital gain on the original sale date, incorporating both the amount received then and the expected amount to be received in the future. This latter element is known as a "chose in action" and is basically an estimate of the right to future income. Quite complicated but the following webpage gives you an idea of how it all works:

http://manuals.voa.gov.uk/corporate/publications/Manuals/CapitalGainsTaxManual/pnotes/b-cgt-man-pn3.html

So, capital rather than revenue, but liable as at the original sale date, not the eventual date the amount is received.

BTL_Reading

Pennywise wrote: »

It could well be just one capital gain on the original sale date, incorporating both the amount received then and the expected amount to be received in the future. This latter element is known as a "chose in action" and is basically an estimate of the right to future income. Quite complicated but the following webpage gives you an idea of how it all works:

manuals.voa.gov.uk/corporate/publications/Manuals/CapitalGainsTaxManual/pnotes/b-cgt-man-pn3.html

So, capital rather than revenue, but liable as at the original sale date, not the eventual date the amount is received.

Thanks very much for that feedback.

I'm reminded that I got some advice from an accountant when the sale of shares first happened, and I just checked what he said. Whereas on the initial sale if the subsequent years payments had been known or estimated, I would have had to pay CGT at the time (I guess this is the 'chose in action' you refer to) but fortunately as the legal dispute happened before that estimate was committed, it was decided at the time there was no realistic estimate (still could lose case).

He told me then (which I hadn't spotted until now) that "if further payments are received, these will be taxed during the year of receipt for CGT purposes", and I notice from your (very useful) link about Marren v Ingles it says "the further sum was itself a separate chargeable asset and that it was not simply a deferred part of the price of the shares" which both imply that a settlement years later should be taxed as of when the payment's made - if my reading is right?